Q&A Should You Include BAH in Savings Rate Calculation? Military FI Savings Rate | Military Money Manual Podcast Episode 52

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In this Q&A episode, Jamie and Spencer answer listener Dustin's questions from a Facebook message: “When you talk about savings rates, are you talking base pay only or do you include BAH and BAS in that percentage?”

It's a nuanced question, but in general you should include all of your income when calculating your savings rage. But, the fact that you're even thinking about a complex topic like savings rate means you are already way ahead in the financial game.

Military Money Manual Podcast Episode 52 Links

Military Money Manual Podcast Episode 52 Transcript

[00:00:00] Intro: Welcome to the Military Money Manual Podcast, where every episode is all about achieving financial independence in the military faster than before. We believe personal finance shouldn't be boring or intimidating. Building wealth can be simple, and financial freedom is the ultimate financial goal. Now, here's your hosts, Spencer and Jamie.

[00:00:25] Spencer: Hello, and welcome to another episode of the Military Money Mail podcast. I'm your host Spencer here with my friend and co-host, Jamie. Hey, Jamie. 

Today we're doing a Q & A edition of the podcast. We've got a question from a listener and reader here, Dustin, on Facebook. 

Jamie, what did Dustin say?

[00:00:46] Jamie: So Dustin wrote in a couple months ago, we had this conversation via Messenger, but I wanted to make sure all the listeners got to benefit from the discussion that we had. 

Dustin asked, “When you talk about savings rate in your podcast, are you talking base pay only or do you include BAH housing allowance and BAS in that percent?”

What do you think, Spencer?

[00:01:04] Spencer: Yeah, so I think the most accurate way to calculate your savings rate is you have to include all of your pay, right? Because that's your income. So you're getting your base pay for most people. You're also getting BAH and you're getting BAS. And then for some people you're getting special pays as well.

So for us, we got flight pay for many years. And when we're deployed you get hazardous duty pay. I think to have the most complete picture of your income you have to add all those things up. And for most people it's gonna be base pay plus BAH plus BAS equals your total pay. And then if you have any special pays, then you add that in as well.

Yeah. And then the percent of that after tax is your savings rate. I mean, you can calculate it before tax as well, and then just include taxes as an expense. As an expense. For a lot of people, especially high income earners, their biggest expense is taxes.

Yeah. Because it just gets to that point where they're paying a lot of money in taxes when you're in the military. Thankfully, we often don't have that problem. Yeah. We have the opposite where we have very low tax. If you have kids, you're getting a child tax credit. Yeah. So a lot of times the government's paying you money if you're deployed.

I mean, I went to the United Arab Emirates for two years and I basically. Three years of almost entirely tax free income, which is insane. Yeah, because I was a senior captain at the time, making over six figures and none of it was taxed. So that opens up a lot of opportunities. You know, you can go down rabbit holes like Roth IRA conversions, moving money from traditional accounts to Roth accounts because you're paying such a low tax rate on it.

[00:02:43] Jamie: Dustin, if you're just trying to figure out exactly your percentage, it's not a huge deal how you calculate it, but just know that it could affect your expenses that you're planning if you're pushing towards calculating a financial independence or a FI number of when you'll achieve financial independence or planning your expenses in retirement.

You need to account for some kind of housing expense. So probably the easiest way to do that right now is to include BAH, but there's no five police or savings rate police that are gonna come after you. It might change the number a little bit. Maybe it goes from 17% to 12% or vice versa. But either way you do it if you're talking about savings rate, you're doing something right and we.

[00:03:23] Spencer: Yeah, I think that's a great point, right? If you are, so if you're getting down to such a nuance that you're like, Wait, is this calculated before tax or after tax? Yeah. Or is this, you know, what is, what does this include? I mean, just the fact that, you know, what a savings rate is.

I mean, that's incredible, right? Like you, you are, you are probably in the top 90% of Americans in terms of the financial knowledge right there. Yeah. Because if you look at the average American savings rate, I mean, for many years it's negative. Yes. Which means, People not only aren't saving anything, they're going into more debt.

And if you look at other cultures though, like China and India and stuff, like they have much higher savings rates, because that's kind of how their culture is set up. But that's not true in America. So when you have the idea of a savings rate and you're working towards increasing your savings rate.

I mean, you can't go wrong in any way you calculate it, you know, if you're like, Oh no, I've been miscalculating it all this time, and instead of saving 30%, I was saving 25%. It's okay. Yeah, you're gonna, you're gonna be okay. 

[00:04:22] Jamie: Great point. I'm going to put you on the spot here with a question. We do talk about savings rates and the higher the savings rate, the sooner you'll be able to achieve financial independence. 

What's a good starting target? You know, is it achievable for everyone to attempt a 50% savings rate right off the bat?

[00:04:39] Spencer: Absolutely not. No. I mean, that'd be crazy. It would be like asking someone to go run a four minute mile when they can't even get themselves around the track walking. Yeah. 

Like so many things in life you need to work up to it. I think initially just having the idea of a savings rate and knowing that if I increase it, I can achieve financial independence that much faster. That's a great place to start.

And then start with the 5% contribution to your TSP, right? And then adjust your lifestyle around your “newly reduced” paycheck. But you're not, it's not actually reduced because you're getting the TSP match. It's going into the, into the tsp, and it's gonna be growing for you. And when you turn 60, you're gonna be pretty happy that you started that savings habit when you were younger. 

So if you can focus on just getting started, Jamie likes to say just do something. Yeah. And then slowly build up to there, you know, as soon as you hit maybe a 10% or 15% TSP contribution, you're doing pretty good. Yeah. Plus you're getting the 5% match.

So, you're probably approaching a 20% savings rate actually. That's a good place to be. I mean, you're already kind of on the road and hopefully, especially if you're starting this out when you're younger, your income is going to increase as well, and your lifestyle won't inflate as fast as your income increases.

You know, if you can stay humble and just live a pay grade below what your current pay grade is, it's very difficult to get into trouble. 

[00:06:14] Jamie: One of the biggest takeaways that we like to talk about with savings rate is that you have control over the destiny of how long you have to work, and you have options with that.

So if you're able to save a lot and have a high savings rate, that just means you are closer to being able to have that FU money or the choice to stop working. But I mean, if you're starting out right now with a zero, and this year you can make it a 7%, or next year you can make it a 12% and then you work up to maybe three years from now, you're up at 25, 30% or maybe higher, but don't be discouraged if it's low right now.

Probably not Dustin's issue based on his question, but make a goal to make it bigger than it is right now, if you can, versus what the number is. Growth is more important at this point for a lot of people.

[00:06:58] Spencer: Yeah, that's definitely true. I heard this advice, basically start with a 5% contribution to your TSP as soon as you join the military and every year that you're in, increase it, but just by 1%. And your pay is going to naturally increase because you're gonna get time in service. And Congress usually increases our pay by 3-5%, hopefully more this year, hopefully more with inflation this year. But when you do that, you're not going to really notice it because you're getting a pay increase and you're just taking a little slice out of it and kicking it over to your TSP.

And if you do, for a 20 year career. I mean, towards the end of your career you're making more money and you're contributing more of your pay to the TSP. And if you did a 20 year career, I mean, congratulations, you're already won because you're going to get the pension and you're going to get free healthcare for life.

[00:07:49] Jamie: Yeah, that's great. Another tip we've talked about before, as you progress in either a time and grade bump or your incentive pay goes up based on the number of your years you've done, I got a recent bump of $300 a month. So I went in and changed the percentage for special pay, which I think is the category.

Yeah, to 30%. So that 30%, the $300 change just went straight to TSP. So I never saw the increase, but I was never missing the increase either. Right. So that's a nice hack. If you know you have a bump coming up, then maybe consider something like that as well. 

[00:08:22] Spencer: Yeah, I Iove that. Yeah. So I think that pretty much answers the question for Dustin there.

When you talk about savings rate, are we talking base pay only? No, typically not because in the military we get a lot more pay than just base pay. So make sure you add up all your pays if you're trying to calculate your savings. Right. But even more important, I think, is focusing on what your expenses are and then working back from there.

And so if your expenses are say, $1,000 a month, well, I mean, congratulations. That's a pretty low target to reach financial independence. I mean, only 25x your annual expenses. If it's $10,000 a year, then that's, that's a quarter million dollars.

That might seem a lot, like a lot of money if you're just getting started. But with a long enough time horizon and the power of compounding interest and building the habits of good saving, it is achievable in a lot quicker of a time than you might think.

[00:09:22] Jamie: Cool. Good episode.

Dustin, appreciate you reaching out. As always, if you have questions, you can reach us on Instagram @militarymoneymanual. Or via email, info@militarymoneymanual.com. And as always, we appreciate the reviews on Spotify and Apple Podcasts. Thank you guys for listening. We'll see you next time.

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